United States: Oil And Natural Gas Production: Opportunities, Challenges, And Political Quandaries

The expansion in recent years of domestic oil and natural gas production has profound implications for the supply of energy in the twenty-first century. It has reignited calls for the nation to achieve "energy independence," and has led to reconsideration of the ban on the exportation of domestically produced crude oil. At the same time, the resurgence of oil and natural gas activity has been met with increased governmental oversight and regulation. Rising production of oil and natural gas also has created tensions with the development of alternative sources of energy. In each of these areas, the surge in domestic production not only has presented the oil and natural gas industries with tremendous opportunities, but also has presented significant challenges for industry, regulators, and communities, and has landed the oil and gas industry squarely in the middle of several political quandaries.

Driven by innovations in drilling and completion techniques, development of oil and natural gas reserves found in shale formations (fine-grained sedimentary rocks with relatively low permeability) is one of the most rapidly growing trends in U.S. domestic energy exploration and production. U.S. Dept. of Energy, Office of Fossil Energy, Shale Gas 101, http://energy. gov/fe/shale-gas-101. The increased development of shale reserves, and its concomitant increase in oil and gas production, is the direct result of the expanded use and functionality of the technique known as hydraulic fracturing or "fracking."

In the fracking process, an oil and gas operator injects water, sand, and a mixture of certain chemicals into rock formations to create fissures that provide pathways for the oil or natural gas to escape and flow into the well bore for ultimate recovery at the surface. See Oil and Gas; Hydraulic Fracturing on Federal and Indian Lands, 80 Fed. Reg. 16,128, 16,131 (March 26, 2015). In most cases, the oil or natural gas embedded in the shale rock simply cannot be produced without the use of fracking. This explains why up to 95 percent of new wells today are fracked. Shale Gas 101, supra.

This increased use of fracking, in combination with horizontal drilling, has sent domestic oil and natural gas production into what commonly has been termed the "Shale Revolution." According to the U.S. Energy Information Administration (EIA), domestic oil production in the United States has nearly doubled since 2008, from around five million barrels per day to somewhere near 9.5 million barrels per day today. Similarly, between 2005 and 2013, total dry natural gas production in the United States increased by 35 percent. EIA, Annual Energy Outlook 2015 (Apr. 14, 2015), www.eia.gov/forecasts/aeo/.

Even as commodity prices have fallen in 2015, the nation's production of oil and natural gas has remained at historic highs. For example, North Dakota saw a reduction in oil production by 25,000 barrels per day, and the number of active producing wells in the state fell in September 2015 for the first time since 2003. Despite this increase, the state's overall production remained above one million barrels a day—a historically significant milestone only recently achieved in the state. Lynn Helms, North Dakota Industrial Commission, Department of Mineral Resources, Director's Cut (Nov. 13, 2015), www.dmr.nd.gov/oilgas/directorscut/directorscut-2015-11-13.pdf.

American Energy Independence

The rise in American production of oil and natural gas is often touted as the pathway toward American energy independence. While buzzwords and catchphrases are convenient for the media and politicians, they often say very little. Such is the case with the term energy independence. A standard definition of independence is the freedom from dependence on or control by another person, organization, or state. Viewed in this light, the increase in domestic production of oil and natural gas since 2005 has made the United States largely energy independent, at least at levels not seen since the early 1970s. From January through May 2015, the United States produced approximately 89 percent of the domestic energy consumed, the highest level since 1984. By contrast, in 2005, domestically produced energy accounted for less than 70 percent of domestic consumption. At the same time, through July 2015, foreign sources accounted for only slightly more than 25 percent of the total petroleum supply, the lowest level of net petroleum imports since 1971, and in stark contrast to slightly more than 60 percent in 2005. Mark J. Perry, Monday Afternoon Links (Aug. 31, 2015), www.aei.org/publication/monday-afternoonlinks-24/. The EIA has estimated that if prices post slow and modest rises in the coming years, the United States will be a net exporter of energy in 2028 (or 2019 if oil prices somehow would spike to over $100 a barrel). EIA, U.S. energy imports and exports to come into balance for first time since 1950s (Apr. 15, 2015), www.eia.gov/todayinenergy/detail.cfm?id=20812.

Energy independence, then, really isn't the issue. Instead, the more pertinent and significant issue is America's dependence on foreign oil. In 2014, the United States imported about 30 percent of the oil it used, a far cry from the nation's 60 percent dependence in 2005. In 2014, the United States imported approximately nine million barrels of oil a day from about seventy-five countries. By far the largest supplier of oil to the United States is Canada, accounting for almost three times the volume of oil as is imported from Saudi Arabia. The Organization of the Petroleum Exporting Countries collectively account for about thirty-five percent of United States' imports, while imports from Persian Gulf countries are only around twenty percent. EIA, How much petroleum does the United States import and from where? (Sept. 14, 2015), www.eia.gov/tools/faqs/faq.cfm?id=727&t=6.

Many of the nation's oil refineries were constructed to refine heavier crude oil, like oil imported from the Middle East, Venezuela, and Nigeria, as opposed to light, sweet crude that is the product of domestic shale operations.

A critical factor underlying the nation's dependence on foreign oil is that many of the nation's oil refineries, particularly those on the Gulf Coast, were constructed to refine heavier crude oil, such as that imported from the Middle East, Venezuela, and Nigeria, as opposed to light, sweet crude that is the product of domestic shale operations. Javier E. David, US Oil Output Booms—Now Refiners Have to Catch Up, CNBC (July 13, 2014), www.cnbc.com/2014/07/13/us-oil-productoin-refiners-struggle-with-fruits-of-us-shale-boom.html.

In order to be less dependent on foreign oil, the nation's refining capabilities will have to change. However, the United States has not built a new major oil refinery in over thirty years. EIA, When was the last refinery built in the United States?, www.eia.gov/tools/faqs/faq.cfm?id=29&t=6. It takes several years and millions of dollars to retrofit existing refineries to handle domestic, as opposed to imported crude. Decreased drilling as a result of lower prices, together with an expected leveling off of the rising production from shale resources, make it unlikely many refineries will be converted. The nation's refining capacity will continue to be tied in a significant way to oil imported from the Middle East and other nonsecure regions.

Reduced reliance on foreign oil can have profound economic benefits. A recent study by the global consulting firm PwC concluded the growth in natural gas development is expected to translate into contributing 930,000 shale gasdriven jobs by 2030 and 1.41 million by 2040. PwC, Shale gas: still a boon to US manufacturing? (Dec. 2014). A report prepared for the United States Conference of Mayors found that energy-intensive manufacturing sectors added over 196,000 jobs from 2010–2012 in the country's metropolitan areas alone, largely flowing from activity surrounding inexpensive natural gas. U.S. Conf. of Mayors, Impact of the Manufacturing Renaissance from Energy Intensive Sources 1 (March 2014). Furthermore, in 2013, the United States spent as much as $300 billion importing foreign oil; a significant contributor to the nation's trade deficit. U.S. Census Bureau, Foreign Trade Statistics, www.census.gov/foreign-trade/statistics/index.html. It is axiomatic that money not spent on foreign oil imports and used instead for the production of domestic oil and natural gas would benefit the nation's economy.

Despite these expected economic benefits, there may be a lurking dark side to the nation's increased production of oil and natural gas: excess supply. As prices have plunged in recent months, attention has focused on the excess world supply. Increased world production, largely fueled by increases in production in the United States, has oversupplied the market, leading to reduced commodity prices that, in turn, have rendered expensive techniques such as fracking and long horizontal drilling uneconomic. Oil and gas operators will not continue to drill and complete wells that do not produce oil or natural gas in economic quantities. Reduced drilling and completion will lead to reduced domestic production; and reduced production, when unaccompanied by reduced demand, will require additional imports of oil. In turn, the United States may take one step back from oil independence.

Lifting the Ban on the Export of Domestic Crude Oil

As increased production promotes the prospect of energy independence, it also called into question the utility of the forty-year old ban on exporting domestically produced crude oil. The crude oil export ban was a Congressional reaction to the 1973 Arab oil embargo, and was codified in the Energy Policy and Conservation Act of 1975 (EPCA), Pub. L. No. 94-163, 89 Stat. 871 (1975), with the details in the regulations of the Bureau of Industry and Security (BIS), a Department of Commerce agency.

Though often portrayed as an outright ban on exportation of domestically produced crude oil, the EPCA is not so restrictive. The BIS automatically grants licenses for the export of crude oil for shipments to Canada for consumption or use therein, crude exported from the Cook Inlet in Alaska, as well as heavy California and Alaskan North Slope crude. Other marginal crude exports also do not require a license. See 15 C.F.R. § 754.2(b)(1). The BIS also is empowered to approve export licenses, on a case-by-case basis, upon a determination that the granting of such a license "is consistent with the national interest and the purposes of the [EPCA]." 15 C.F.R. § 754.2(b)(2).

Recently, however, many concluded that increased domestic oil production provided an opportunity for exporting oil consistent with the energy independence and security policies underlying the EPCA. On December 18, 2015, President Obama signed into legislation an Omnibus spending bill that included legislation to repeal the export ban. Consolidated Appropriations Act, 2016, Pub. L. No. 114-113 (2015).

Buried within the 2009-page Omnibus bill (page 1865, Division 0, Title 1, Section 101), the legislation calls for the express repeal of the EPCA and further mandates that "no official of the Federal Government shall impose or enforce any restriction on the export of crude oil." Notably, the repeal legislation has two exceptions: (1) the president retains authority to restrict exports to sanctioned countries, entities, and individuals; and (2) the president can restrict exports for up to one year if the president and the secretary of commerce conclude that exports have caused either material supply shortages or increased oil prices attributable to the export of crude oil produced in the United States.

However, there is no agreement as to the effect the lifting of the export ban will have on commodity prices (in the long term) or the economy as a whole. Supporters of lifting the ban maintain that it will provide economic stimulus and political leverage overseas. Prior to the ban being lifted, the Aspen Institute had concluded that lifting the oil export ban would lead to increased oil production and "[h]igher levels of oil production require higher investment expenditures for capital equipment and construction, which in turn boost overall demand for goods. This stimulates the manufacturing sector and its supply and distribution chains. The resulting improvement in income and employment boosts the economy significantly." Thomas J. Duesterberg, Donald A. Norman & Jeffrey F. Werling, Lifting the Crude Oil Export Ban: The Impact on U.S. Manufacturing 1 (Oct. 2014), www.aspeninstitute.org/sites/default/files/content/upload/FINAL_Lifting_Crude_Oil_Export_Ban.pdf.

The ability to trade freely with the rest of the world also may benefit American shale producers by providing access to both foreign buyers and foreign revenues. According to consulting firm IHS, U.S. production could increase to 11.2 million barrels daily in just eight years as a result of the lifting of the export ban. This increased production would promote sufficient additional economic activity to support nearly one million jobs in four years. IHS, US Crude Oil Export Decision KF-1 (2014), www.ihs.com/info/0514/crude-oil.html?ocid=coe:pressrls:01. Finally, numerous analysts project that allowing crude exports will result in lower gasoline prices for American drivers by further stabilizing world crude supply.

On the other hand, the lifting of the export ban actually could make the United States more dependent on foreign oil. Some analysts argue that the United States simply does not have, and is unlikely to have any time soon, sufficient capacity to refine all of the light, sweet crude produced from the nation's shale formations. Less refining capacity inherently equates to more (excess) supply. In a climate of excess supply, refineries capable of processing oil from the nation's shale formations will pay less than they will after the lifting of the export ban when foreign refineries also can bid on the oil. However, to compensate for the sale of oil to foreign refiners, the United States may have to import more of the foreign, heavy oil that could be processed at the existing refineries. The same analysis demonstrates that the financial impact on refiners from an easing of the export ban could be onerous: "Buried in the latest government analysis on lifting the crude-oil export ban is a piece of data that shows why ending the limits will be a heavy lift: It would cut refiners' profits by $22 billion a year." Mark Drajem, Refiners' Loss Roils Politics of Oil's Push to End Export Ban, Bloomberg.com (Sept. 3, 2015).

Some opposed the lifting of the oil export ban for environmental reasons, concerned that an easing of export restrictions would lead to increased oil and gas exploration and production. At an EIA conference in June 2015, Harold Hamm, CEO of Continental Resources, predicted oil production could reach twenty million barrels per day by 2025 if the export ban is lifted. Justin Mikulka, Lifting Ban on U.S. Crude Oil Export Would Enable Massive Fracking Expansion, DeSmog (Aug. 10, 2015), www.desmogblog.com/2015/08/10/lifting-oilexport-ban-would-enable-massive-fracking-expansion. Such a dramatic increase in production alarms many environmentalists who worry that such an increase in production invariably will result in more fracking, more flaring, more trains carrying flammable crude oil, more spills, more greenhouse gas emissions, and more chances for environmental catastrophes. House Speaker Paul Ryan stoked the fears of the environmentalists when he proclaimed: "Having the export ban lifted permanently is like having 100 Keystone pipelines, and it's really good foreign policy." Michael Bastasch, Paul Ryan Justifies Oil Exports: 'Like Having 100 Keystone Pipelines', The Daily Caller (Dec. 22, 2015).

Increased Federal Regulation

Recently, the oil and natural gas industry has felt another impact of increased production of oil and natural gas—increased governmental regulation and scrutiny. In particular, federal agencies recently have promulgated or proposed regulations related to fracking operations and methane emissions in oil and gas operations.

On March 26, 2015, the Bureau of Land Management (BLM) issued its final regulations regarding fracking on federal and Indian lands. Oil and Gas; Hydraulic Fracturing on Federal and Indian Lands. 80 Fed. Reg. 16,127, 16,128–16,222 (Mar. 26, 2015) (the Fracking Rule). The stated goal was to ensure "that wells are properly constructed to protect water supplies, to make certain that the fluids that flow back to the surface as a result of hydraulic fracturing operations are managed in an environmentally responsible way, and to provide public disclosure of the chemicals used in hydraulic fracturing fluids." Id. at 16,128. The Fracking Rule was challenged in the U.S. District Court for the District of Wyoming in two separate actions brought by industry groups and the states of Wyoming and Colorado. The states of North Dakota and Utah and the Ute Indian Tribe of the Uintah and Ouray Reservation joined the states' action.

U.S. production could increase to 11.2 million barrels daily in just eight years if the domestic oil production export ban is lifted, which would promote economic activity to support nearly one million jobs in four years.

The Fracking Rule was scheduled to take effect on June 24, 2015, but that effective date was postponed by the Wyoming federal court, which had before it several motions for preliminary injunction seeking to stop the implementation of the rule. Then, in an order dated September 30, 2015, the Wyoming federal court enjoined the BLM from enforcing its final hydraulic Fracking Rule and further ordered that its preliminary injunction would apply nationwide. Order on Motions for Preliminary Injunction, Wyoming v. DOI, No. 2:15-CV043-SWS, (D. Wyo. Sept. 30, 2015) (the Fracking Order).

The court concluded that "Congress has directly spoken to the issue and precluded federal agency authority to regulate hydraulic fracturing not involving the use of diesel fuels." Fracking Order at 10. Moreover, the court held that the "Fracking Rule creates an overlapping federal regime, in the absence of Congressional authority to do so, which interferes with the States' sovereign interests in, and public policies related to, regulation of hydraulic fracturing." Id. at 40. As one would expect, the litigation over the Fracking Rule will continue past the Fracking Order.

Decreased reliance on oil is difficult because, beyond using oil and natural gas for fuel and heat, petroleum products are essential to the economy for many uses that cannot be replaced by alternative energy sources.

A second significant set of environmental regulations implemented in response to increased oil and gas activity is a suite of requirements proposed by the EPA that the agency claims "will help combat climate change, reduce air pollution that harms public health, and provide greater certainty about Clean Air Act permitting requirements for the oil and natural gas industry." EPA, Regulatory Actions, www.3.epa.gov/airquality/oilandgas/actions.html . Reducing methane is an important part of the administration's strategy, because methane is twenty times more powerful than carbon dioxide in trapping heat, although it persists in the atmosphere for far less time than carbon dioxide does. The administration has set a goal of reducing methane emissions by 40 to 45 percent from 2012 levels by 2025. The latest proposed regulations are expected to reduce methane emissions by 20 to 30 percent. Id. The proposed regulations include updates to the new source performance standards to (1) set methane and volatile organic compound (VOC) requirements for additional new and modified sources in the oil and gas industry; (2) produce draft control techniques guidelines for reducing VOC emissions from existing oil and gas sources in certain ozone nonattainment areas and states in the ozone transport region; and (3) implement a new source determination rule that would clarify EPA's air permitting rules as they apply to the oil and natural gas industry.

Oil and gas companies oppose the proposals, calling them unnecessary and costly, while environmental advocacy groups say they do not go far enough because they apply mainly to new wells and not most existing ones. The industry points to the EPA's own data that shows that methane emissions from hydraulically fractured natural gas wells have fallen nearly 79 percent since 2005, and total methane emissions from natural gas systems are down 11 percent over that same time period. Carlton Carroll, API to EPA: Failing methane emissions make new rules unnecessary, American Petroleum Institute (Sept. 23, 2015), www.api.org/News-and-Media/News/NewsItems/2015/September-2015/API-to-EPA-Falling-methane-emissionsmake-new-rules-unnecessary.

The natural gas industry in particular also points to the positive effects of the increased use of natural gas in electric generation. Over the past decade, the increased use of natural gas in power production has played a significant role in the reduction of emissions of carbon dioxide, nitrogen oxide, and sulfur dioxide by 23 percent, 40 percent, and 44 percent, respectively. Nanci Bompey & Katy Human, New findings show U.S. power plant emissions are down, Nat'l Oceanic & Atmospheric Admin. (Jan. 9, 2014), www.esrl.noaa.gov/csd/news/2014/148_0109.html. Environmentalists respond by pointing to new research indicating that methane releases from all natural gas-related activities exceed what previously had been believed to be total emissions and are higher than that previously acknowledged by the EPA.

Several politicians voiced their opposition to the proposed methane regulation, including Representative Lamar Smith (R–Tex.), chairman of the House Science, Space and Technology Committee. Congressman Smith issued a press release in response to the EPA's announcement of the proposed regulations asserting that the proposals are part of the administration's "war on American energy jobs." Press Release, Lamar Smith, Smith Statement on EPA Methane Rule, (Aug. 18, 2015). Others in Congress have touted the success of the oil and gas industry in reducing methane emissions and voiced their opposition to additional federal regulations on methane emissions, contending that mandatory reductions are "unnecessary" and would be "less effective than a voluntary, cooperative effort." Press Release, U.S. Senate Comm. on Env't and Public Works, GOP Leaders Oppose Federal Mandates on Emissions (June 11, 2015).

Exploiting Hydrocarbon Resources and Developing Alternative Energy Sources

The increased national production of oil and natural gas has exacerbated the seemingly inevitable conflict between the production of hydrocarbons and the development of alternative energy sources. Many of those cautioning against overdevelopment of the nation's oil and gas reserves due to environmental concerns also contend that the oil and gas production should not take precedence over the growth and implementation of alternative fuels.

In truth, irrespective of an individual's feelings toward the oil and gas industry, the nation will not, at least any time in the near future, be able to rely solely on alternative sources of energy. Renewable energy cannot by itself answer to the country's oil-importation concerns. The EIA has estimated that in 2014, renewable energy sources (biofuels, biomass, geothermal, hydropower, solar, and wind) accounted for about 10 percent of the total U.S. energy consumption and 13 percent of electric generation. EIA, How much U.S. energy consumption and electricity generation comes from renewable sources? (March 31, 2015), www.eia.gov/tools/faqs/faq.cfm?id=92&t=4.

Even one of the most optimistic of all projections coming from the National Renewable Energy Laboratory (NREL) places electric generation from renewable sources by 2050 (still thirty-five years off) at 80 percent—significant, but hardly cause to believe the United States can be free of oil and natural gas. Moreover, even the NREL study points to difficulties in achieving that volume of renewable electric generation: "[M]any aspects of the electric system may need to evolve substantially for high levels of renewable electricity to be employed." Trieu Mai, et al., Renewable Electricity Futures Report: Executive Summary, NREL (2012) (emphasis added), www.nrel.gov/analysis/re_futures.

Decreased reliance on oil is difficult, if not impossible, because petroleum products are essential to the economy, even beyond the standard fuel and heating uses normally associated with oil and natural gas, and many of those uses simply cannot be replaced by use of alternative energy sources. Alaska Congressman Don Young explained it this way:

What many Americans do not realize is how many products are made from a barrel of oil. Someday America's energy may not come from fossil fuels, but the U.S. will never be able to fully cut our ties to them. In a 42 gallon barrel of oil (results in 44.68 gallons through the refining process), 19.15 gallons becomes gasoline (43%), 9.21 gallons becomes diesel (20%), 3.82 gallons becomes jet fuel (9%), and 1.75 gallons becomes heating oil (4%). The remaining, and most important, part of the barrel is the 10.75 gallons (24%) that compose the molecules that make-up asphalt, plastics, lubricants, etc. Failure to develop this 24% of the barrel will leave the U.S. without rubber, aspirin, syringes, golf balls, toothpaste, and even the synthetics that compose windmills and green cars.

Congressman Don Young, Energy Independence, http://donyoung.house.gov/issues/issue/?IssueID=5005.

The supply of energy in the United States in the twenty-first century has been, and will continue to be, dramatically influenced by the domestic production of oil and gas. The increased production of oil and natural gas provides opportunities for increased energy independence (and less dependence on foreign oil, particularly from politically hostile or unstable regions). At the same time, however, increased domestic production is directly linked with increased federal regulation and may be viewed as having an inverse relationship to the development of alternative sources of fuel. However viewed, there can be no doubt of the significant impact—socially, politically, and economically—of the Shale Revolution and the increased domestic production of oil and natural gas.

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